The Obama Surge, The Budget Reality

President Obama - Popular Once More?
The last month has been the single best month in the entire Obama administration in terms of the change in his polling data. From his low point at the beginning of the year, the President's approve minus disapprove rating has surged approximately 9 points. Nearly every non-partisan poll now shows his approval rate exceeding his disapproval rate, the first time that has been the case since June of last year.

In terms of the implication on politics, there are many. The GOP can take solace in the fact that the President's approval was near its floor when the elections occurred in November, which helped to facilitate the large gains in the House of Representatives that the GOP was able to achieve, vaulting John Boehner into the leadership of a comfortably-sized GOP majority in the House.

In terms of the look forward, the poll numbers around this time are significant relative to the 2012 field. Right now is the critical time period when GOP A-listers will make key decisions about whether to run in 2012. If the President looks weak, the A listers will get in the game, if the President looks stronger, they will sit this one out.

Of course, we will have to see if this trend continues or is simply a short-term result of some better economic views and news coverage of legislative victories at the end of the year. A +5% or +6% rating would probably not be enough to discourage the TIm Pawlentys of the world from running, but if the trend continues into the double digits, it could significantly cut down the caliber of the GOP field.

Also, bear in mind that polls this time of year are not terribly predictive of ultimate election outcomes. The poster child for how quickly things can change is George Herbert Walker Bush, who had such strong poll numbers at this stage of the game that Democratic a-listers such as Mario Cuomo sat out the Democratic nomination process, allowing a little-known Governor from Arkansas to grab the Democratic nomination. You know the rest of that story.



In the monthly numbers, the surge is just starting to show up. The President's January average has turned positive for the first time in over 6 months, but still significantly trails his current daily averages, which implies a strong likelihood that these numbers will trend up in the coming couple of weeks.



How the Federal Government Spend Its Money and Why Current GOP Proposals Fail the Laugh Test
By 2020, 92% of our federal tax revenue will be consumed by entitlements and interest on the national debt. If we maintain current revenue levels and entitlements as they exist today, we would have to cut defense spending by 75% and all other government programs by 100% in order to balance the budget. That means no FBI, no USDA, no SEC and no federal highways. A defense infrastructure that is a shadow of its former self.

Simply put, the GOP deficit reduction plan as it has been expressed is a mathematical impossibility. You CANNOT:
(A) Not raise taxes
(B) Maintain defense spending
(C) Maintain entitlements
and
(D) Balance the budget

The GOP has put forward proposals to scale back domestic discretionary spending. These proposals are meaningful debates that are worthy of discussion. But they are wholly insufficient.

Without a comprehensive discussion on tax reform, entitlement reform and defense reform, we WILL fail to balance our budget.

In fact, the only perspectives in the modern world that we have had that led to balanced budgets are very instructive:
(a) The 40s and 50s
Massive cuts to our defense budget post-World War 2, massive tax increases, including a top marginal tax rate of over 90% and unprecedented economic growth led to a balanced budget

(b) The 90s
Two rounds of major tax hikes, one signed by George Herbert Walker Bush and one signed by Bill Clinton, combined with massive defense cuts (remember "the peace dividend"?) and major reductions in discretionary spending (welfare reform, the end of the "era of big government") led to a budgetary surplus.

This time around, we have the added burden of massive coming entitlement obligations as the baby boomers retire.

We will need a full court press not just on domestic discretionary spending, but on taxes, defense spending and entitlements if we are going to get our fiscal house in order.

How about some leadership from the party of the balanced budget amendment?

A Real Discussion About the Economy, Obama the Comeback Kid?

Note: While much media attention has been paid to the aftermath of the shootings in Tucson over the past week, I do not intend to devote further digital ink to the topic unless issues of policy warrant further discussion. I do not consider the shootings or their aftermath a political issue and condemn unequivocally those on both sides of the aisle who have attempted to make it one. My thoughts are with the victims of the shooting and may Jared Loughner rot in hell.

Our Long Term Economic Future? Look to Our Infrastructure, Science and Education
In the sound-bite world of politics, serious economic discussion rarely takes place. Democrats speak of the need for government intervention to stabilize the economy and get Americans back to work. Republicans talk of the need to reduce government intrusion into private industry and let capitalism drive growth. Both sides largely miss the point most of the time.

Truth be told government intervention is neither inherently bad nor inherently good for an economy. It all depends on the nature of the investment.

Let's start by understanding what drives long-term economic growth. The size of an economy is determined by its Gross Domestic Product, the value of goods and service produced by that country. This is the all-important figure. It determines the value of goods and services that can be divided up amongst the citizens of the country. It is the measure of the wealth of a nation.

So what generates GDP? The simple way that I like to break down the equation is as follows:
GDP = Productivity * # of Workers * # of Hours Worked per Worker

Productivity is the value of what the average worker produces in one hour of work.

But GDP itself is not terribly instructive. The GDP of China exceeds the GDP of both Japan and Germany at this point. But no sane person that has visited all 3 places would call the average Chinese person more wealthy than the average person in Japan or Germany...it isn't even close. The reason China's GDP is so much larger is simply because it has so many more people, simply from the equation above, there are more workers even though the workers are less productive.

So to estimate how the average American is doing, or the average Chinese person or wherever, we usually use a term called Per Capita GDP, which is simply total GDP divided by the size of the population. This gives a good proxy for the average wealth of a citizen within each country. This changes our equation slightly:
Per Capita GDP = Productivity * Workforce Participation Rate * # of Hours Worked per Worker

So how wealthy the average person in country is can be described by three factors, how productive the workforce is, what proportion of the population works and how many hours each worker works.

So let's talk about how we "grow the pie" and increase Per Capita GDP.

In a typical recession, the last two terms of the equation shrink significantly...that is, you have a lot less people participating in the workforce and a lot less hours worked because you have a lot of unemployed and underemployed individuals. This can hurt. Workforce participation has dropped by over 5% in this recession and hours worked by at least 2%. This leaves a 7% hole in our wealth from where we started.

This is why, in times of recession, politicians spend a lot of time talking about getting people back to work. But the truth is, while this is an important short-term issue, simply employing more people will not spur long-term per capita GDP growth.

The reason is simple -- we hit the practical maximum pretty quickly. The unemployment rate in the US is presently 9.4%. Employing every single unemployed person (a feat that is not practical as unemployment rarely goes below 5% and never falls below 2%) would grow the economy only 10%.

Similarly, increasing hours hits a practical maximum pretty quickly. Hours could increase some now as people who have been forced into part-time work resume full-time work. But returning to pre-recession levels would only increase hours by 2%. Beyond that, who wants to start working 80 or 90 hour weeks routinely? That might spur economic growth, but we'd never be off work to enjoy our wealth. If anything, the social trend is in the opposite direction, with the generation presently coming of age preferring less work at lower pay rather than more work at higher pay.

So taking the last two terms of the Per Capita GDP equation to their practical maximum might yield 10% or even 12% growth if you really stretch it. That is about 2 to 3 years worth of growth in a healthy economy. Then what?

The answer lies in the first term of the equation - productivity. Unemployment and hours trend up and down with financial cycles, but productivity growth is the engine of long-term wealth generation.

So what influences productivity? A lot of things obviously influence how productive various workers in various industries are, but I believe that almost all of those factors can be distilled down to three basic categories:
Infrastructure, Education and Science

Think about what makes you productive in a job. If you are a truck driver, having efficient roads and bridges do. If you are an office worker, productivity tools such as the internet do. Your knowledge and skills, gained through education, most certainly do.

Also think about the game-changers of the past century in the economy and in society. The television. The internet. The microwave oven. Modern plastics. The GPS. You know what these things have in common? They were all technological game-changers that remade the economy and society. And they were all commercializations of basic scientific research carried out by the federal government.

Think about where the country would be without the Eisenhower Interstate System. How about without airports in major metropolitan centers? How about without a universal power grid? All infrastructure investments by the federal government (sometimes in cooperation with state governments.)

Now...think where our economy would be if there were no public schools. I imagine our workers wouldn't be the most productive in the world, as they are now.

Now, think about the major scientific, infrastructure and educational investments the government is making today and how they will spur the growth of tomorrow? NASA? Cut way back. Basic research investment? Its lowest level in decades. Infrastructure spending? Our power grid, air traffic control system and interstate were built in the 1950s. And China has better mass transit infrastructure than we do, to say nothing of Europe.

Education? Subsidies to public universities are falling across the country. Primary and secondary schools are getting squeezed as states and localities face budget shortfalls.

The real debate that we need to be having about the economy is how we can free up funds to invest in infrastructure, science and education. It isn't about the size of government, it's about WHAT it does. The federal government did a world of good in the 1940s and 1950s to set-up 6 decades of prosperity, despite facing down a massive debt following the end of World War 2. I would hope our politicians would look for ways to do the same.

Obama - On the Comeback Trail?
I will publish a full update next week, but President Obama's numbers have moved back to being solidly positive (that is, his approval minus disapproval is significantly greater than 0) for the first time in several months. The spin in the media is that this is due to the lame duck Congress and its productivity.

While I'd like to believe that the American public is rewarding bi-partisanship and is happy about the end of Don't Ask, Don't Tell and a nuclear arms treaty with Russia, as I said before, I find it hard to believe that they a. have been paying close attention and b. care much how many warheads Russia is going to reduce over the next decade.

A far more plausible scenario, in my mind, is that, as it usually is, this is all about the economy. Unemployment is finally starting to fall, the economy has been growing for some time, those who stuck with their investments through the crash are close to being back to even (those who sold at the bottom out of fear have no one to blame but themselves) and fear and panic have been replaced by some combination of hope and greed. In other words, the economy is in full recovery. An economic recoveries lead to popular Presidents.

The link below shows the study I've been promising to link to that demonstrates just how strongly economic conditions dictate results. The incumbent party does well when incomes are growing, poorly when they are not.

The Washington Post article highlighting this study is located here.

All told, if income growth in the election year is 1.5% or greater, the incumbent party generally wins, otherwise they generally lose. You can see that the predictive powers aren't perfect: an incredibly popular former General named Dwight Eisenhower caused the GOP to outperform in 1952 and seize the Presidency from Truman's Dems. The incredible unpopularity of the Vietnam War sank the Democrats in 1968, despite economic conditions at the time (it was so bad, LBJ didn't even bother running for re-election.) A charismatic Bill Clinton dramatically outperformed in 1996 against a lackluster Bob Dole. 2000, while technically correct (Gore indisputably won the popular vote), was a bit of an outlier in terms of the electoral outcome.

But most races are pretty tight to the line. Barry Goldwater's awful campaign in 1964? Turns out he finished right about where he should have, given the economic prosperity. The Reagan Democrat coalition in 1980 and 1984 that supposedly changed the political equation? Turns out he finished right about where he should have both years. John Kerry's 2004 disaster? Right on the line. Obama's Hope and Change in 2008? Right where it should be.

The point is that much as we like to think every election cycle is unique, the odds are that 2012 will play out somewhere close to the line as well. Which means that if incomes grow 1.5% or more in 2012, Barack Obama will likely win a second term. If they don't increase by that much, he will likely lose. If I'm the President, given the track of the recovery, I feel pretty good about that line.

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Violence Undermines All of Our Rights

The horrific shooting of over a dozen people in Arizona, including Rep. Gabrielle Giffords (D) is an assault on our Democracy. We do not yet know, though circumstances seem to suggest, that the attack was motivated by fringe political beliefs. Regardless of whether this proves to be true or not, awful acts such as this demand a forceful defense of our Democracy.

Our republican system of government is built on the premise of free speech, a free press and free elections. People of differing viewpoints debating and discussing issues and the people ultimately choosing officials that they trust to make difficult decisions on those issues. It is built on the premise that open debates allows the best ideas to succeed, not the ideas with the biggest guns.

Violence against our elected officials assaults our system of government. The actions of Jared Loughner aren't just awful on a moral and human level, they are patently un-American. In American, we debate our opponents, expose the flaws in their points of views and try to beat them at the ballot box. We don't pull out guns and start shooting. Cowards with weak ideas do that.

I commend our elected officials on their swift, universal and well-explained condemnation of these acts.

From President Obama:
"It’s not surprising that today Gabby was doing what she always does -- listening to the hopes and concerns of her neighbors. That is the essence of what our democracy is all about. That is why this is more than a tragedy for those involved. It is a tragedy for Arizona and a tragedy for our entire country.

What Americans do at times of tragedy is to come together and support each other. So at this time I ask all Americans to join me and Michelle in keeping all the victims and their families, including Gabby, in our thoughts and prayers. Those who have been injured, we are rooting for them. And I know Gabby is as tough as they come, and I am hopeful that she’s going to pull through."

From House Speaker John Boehner:
"I am horrified by the senseless attack on Congresswoman Gabrielle Giffords and members of her staff. An attack on one who serves is an attack on all who serve. Acts and threats of violence against public officials have no place in our society. Our prayers are with Congresswoman Giffords, her staff, all who were injured, and their families. This is a sad day for our country."

From Arizona Senator John McCain:
"Whoever did this; whatever their reason, they are a disgrace to Arizona, this country and the human race, and they deserve and will receive the contempt of all decent people and the strongest punishment of the law."

Now, my plea to all of you. Let's not stoop to the level of an evil man like Jared Loughner.

If you are a conservative, follow what leaders like Boehner and McCain have said and simply condemn the attack. Resist the urge to ascribe the attacks to government overreach on health care. No reasonable person would start shooting people because they disagree with insurance regulations. No reasonable person would shoot people because they don't like unemployment benefits being extended. If you support or condone in any way the actions of Jared Loughner, than you are not a patriot, you are an evil person and a shrinking coward.

If you are a liberal, follow the lead of President Obama. Resist the urge to blame opposition to President Obama's policies or the tea party for the attack. We may learn Loughner shares some political views with those groups. But the Republicans and the tea party are not Jared Loughner. An un-American loser taking to violence does not negate their right to have legitimate differences of belief with the President. All of their leadership has condemned the attack. The GOP cannot be painted with the brush of Jared Loughner any more than Democrats could be painted with the brush of John Hinkley.

Now is a time for us to come together as a nation. We all have strongly held beliefs about the direction of country and our system of government. There is legitimate debate to be had. But we must protect our system of government in order to improve it.

A Rocky Start to the New GOP House, A Dangerous Game with the Filibuster

Ugly Week 1 for the GOP
The good news if you are a Republican rooting for John Boehner and the new GOP majority to succeed in the coming two years is that the public attention span is short. To the extent that the average voter is paying attention at all these days (which is, in and of itself, fairly questionable), they will likely forget most of this month's misgivings long before November 2012.

Having said that, the new GOP House is off to a fairly embarrassing start. It's been less than a week since they assumed power and there have already been major snafus.

(1) The Non-Swearing In
Two new members of the GOP majority, Rep. Mike Fitzpatrick (PA) and Rep. Pete Sessions (TX) missed the House swearing-in ceremony and where therefore not properly sworn in as members of the House. In spite of this, they cast several votes in the first week, although they were not yet legally congressmen.

The worst part of this story is the reason that they missed the swearing in. They missed it -- they were attending a fundraiser at the capital. Not a great start in standing up to special interests that you are too busy cozying up to them to attend your own swearing-in. Also, House rules prohibit fundraisers at the capital.

The GOP majority elected to pass a resolution invalidating their votes until they were properly sworn in, but letting any bills submitted or speeches given to stand as part of the record. This is an imperfect (if they weren't legal members of the House, they shouldn't be allowed to perform any of the duties) but probably acceptable solution (invalidating bills submitted or speeches given would be largely symbolic, since they could simply resubmit these materials after being sworn in.)

Oh by the way, Sessions participated in the reading of the constitution on the House floor. Maybe he should've paid attention to what he was reading.

(2) Transparency? We Don't Need No Stinking Transparency!
One of the primary complaints of the GOP minority in the House this past congress was the lack of transparency of the operations of the House. In one way, this charge seemed absurd, since all House proceedings are readily viewable by everyone on CSPAN. On the other hand, there were legitimate criticisms...insufficient time for members to read long, complex pieces of legislation, a lack of opportunity for the minority to amend bills and the lack of a mechanism requiring that bills be paid for, rather than simply piling on the deficit.

In order to combat this, the GOP had proposed new rules...a 72-hour requirement between the post of final legislation and a vote, a minimum requirement for the number of amendments that would be allowed and a requirement that bills be paid for with offsetting spending reductions. These were all solid proposals that would improve the operation of the House.

Yet, on the first significant vote of the new House, a bill to repeal the health care bill passed last year, the GOP chose to waive all three of these new rules. Amendments were not allowed. The vote took place less than 24 hours after posting of the final bill. The bill, according to CBO estimate would increase the deficit by over $200B over the next decade.

So much for openness and transparency.

(3) $100B? Who said $100B?
Perhaps the most central issue on which the GOP ran their national campaign this past year was reducing government spending. Over and over, the promise was repeated that the GOP would reduce spending by $100B in the first year, as part of their effort to bring spending back to "pre-stimulus, pre-bailout" levels.

Now, the GOP is already hedging. Boehner says cuts will likely be at only half of that level. He says that this is due to the fact that the actual spending enacted by the previous congress was less than the original proposed Obama budget.

Putting aside for a second the fact that $100B in spending cuts scarcely puts a dent in the federal deficit, backing off even that very modest level of spending reductions is a flaring indication of what I have been saying all along...that if you exclude entitlements, defense, veterans affairs and any new taxes, there is simply no way to balance the federal budget.

If the GOP can't present a credible path to reduce the deficit, then the whole getting the out of control government spending line of logic falls apart. What does the GOP stand for if they intend to continue spending at elevated levels and not pay for it?

On one positive note, the GOP did cut pay for key leadership posts by 5%. This is a good move, although largely symbolic, since the money involved is fairly inconsequential.

Be Careful with the Filibuster
In the 111th Congress, the GOP used the filibuster to a far greater extent than had ever been seen in the history of the Senate. So filibuster reform is an understandable cause that the now-weakened Democratic majority would want to take up.

To borrow a phrase from the South, as with eating catfish off the bone, the Democrats should chew carefully.

There is room to reform the filibuster from its present state to make the Senate more functional. But moves to effectively eliminate it entirely would be extremely dangerous for minority rights in the Senate.

I think proposals that eliminate the capability to filibuster STARTING debate on a bill probably makes sense. I think requiring Senators who wish to filibuster to actually take to the floor of the Senate and speak makes sense. But anything that would weaken the vote requirements to break a filibuster or to eliminate the capability to filibuster a Presidential appointment would be dangerous.

Democrats should remember that they could well be in the minority in two years and apply a little golden rule logic. Having some checks and balances on majority power is not a bad thing.